Acacia, the Patent Troller: Good to Buy
Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Acacia Research Corporation (NASDAQ: ACTG) very much benefitted from Apple’s (NASDAQ: AAPL) successful defense of its patents as because its job is to defend infringed patents. Acacia’s business model is being validated and patent portfolios also became valuable just because of the iPhone maker’s victory over Samsung. It was proved that patents can be defended accompanied by huge awards. So companies infringing on patents held by Acacia are more willing to settle out of court and license use of the patents. Settling out of court will avoid lawyers' fees and Acacia will be in a position to have higher margins.
Let us see Acacia’s job in a macro point of view. There are individual inventors, university labs, small companies who don’t know how to defend their patents may be because of time, energy, financial backup and resource. It is also a difficult part for them to find out who is infringing on their patents. The Newport Beach based company started its business by representing the above mentioned individual and company. The company makes partnership with those patent holders and becomes an exclusive licensee. Then, the patent portfolio is handed over to its subsidiaries who are specialized one and those subsidiaries contact the infringing companies. They either licensed the patent to them or enforced the patent in court. A pre-agreed percentage of the recovery or license fee is given to the original owner by Acacia. The company’s subsidiaries again make partnership with inventors and patent owners, license the patent to corporate users and share the revenue. The subsidiaries now control over 200 patent portfolios which covers technologies that are used in a wide variety of industries.
It can be observed that both patent holder and Acacia are benefitted. Acacia grew their revenue from $67 million in 2009 to $185 million in 2011, nearly tripling their revenues in two years! Their revenue has continued to grow this year which already booked about $150 million in the first six months. As Acacia and its subsidiaries grew in scale, they started to license entire patent portfolios from larger companies who wanted to make some profit out of their patent holdings. Some outright purchases of patent portfolios from companies that needed cash and were willing to sell are also being made. Owning patent outright won’t split the winnings with a partner and will fetch a double profit.
In 2010, the company had a huge breakthrough by signing a deal with Oracle and licensed all the patents in Oracle’s portfolio for three years for $25 million followed by a similar deal with Microsoft for $40 million six months later. In 2011 Acacia negotiated with Samsung for $45 million. These large structured deals helped the company to make more and more revenues. Twelve months trailing revenue depicts that they are accelerating. Early 2012 the trolling company made a series of licensing deals with Cisco and in July entire patent portfolio was licensed by their subsidiaries to Hewlett-Packard. Recently settlements are made with Commerce Bancshares and Citigroup.
Dealing with big companies, Acacia now gained a renowned position in the market and infringing companies also find it more suitable to settle with them or to license their patents rather than fight it out in court. As Microsoft, Oracle, and Samsung have strong faith on Acacia for licensing therefore small companies must give a thought about a court fight, which would be expensive, and which they'd probably lose.
In recent months the California based company’s share price had fallen from over $42 to a low of about $23.50 before it started to rebound because of Apple versus Samsung patent fight. Samsung was a big customer for Acacia, so there was a big question mark that how this loss would affect Acacia. However Samsung is licensing with different patents from Acacia which are not involved in that fight. On the contrary, Apple's win only reinforces the value of Acacia's entire patent portfolio.
Right now Acacia can expand its wings without any bindings. But there may be certain constraints that Government might change the patent laws that will be harder to enforce. This change in patent laws will not happen in the foreseeable future. Another constraint is competition from rival company. By knowing Acacia’s business background another company may rise against the patent troller for the best patent portfolios. Acacia is quite clever because it is being controlled by well trained and professional persons. As Acacia has gained a well known position by dealing with Microsoft, Oracle, Samsung and many other big companies so individual or company will not try a new one rather than Acacia. The company recently expanded its business in medical technology field and is constantly in a search of new fields for expansion.
Acacia has good future growth and it is a company which is continually acquiring new patent portfolios and licensing others, and which is selling at a ridiculously low price. So nimble as well as tactical investors can easily invest in this company for a huge return as this is the company dealing with Oracle, Microsoft, Samsung, Cisco, Hewlett-Packard, and many others. And Apple’s win over Samsung further increased the value of their business model. I think that the company will grow more and more and its share price will also rise high so, it is good to buy.
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abirk has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.